In Macroeconomics, You Studied the Equilibrium in the Goods and Money

question 16

Essay

In macroeconomics, you studied the equilibrium in the goods and money market under
the assumption of prices being fixed in the very short run.The goods market equilibrium
was described by the so-called IS equation $$R _ { i } = \beta _ { 0 } - \beta _ { 1 } Y _ { i } + u _ { i }$$
where $R$ represented the nominal interest rate and $Y$ was real GDP. $\beta _ { 0 }$ contained variables determined outside the system, such as government expenditures, taxes, and inflationary expectations.
The money market equilibrium was given by the so-called LM equation
$$R _ { i } = \gamma _ { 0 } + \gamma _ { 1 } Y _ { i } + v _ { i }$$
and $\gamma _ { 0 }$ contained the real money supply and the intercept from the money demand equation. Show that there is simultaneous causality bias in this situation.

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